While TARP Celebrates, PPIP Stumbles

Not all the acronyms are working.

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The policy makers and politicians who scrambled to get the Troubled Asset Relief Program (TARP) passed last year have reason to be pleased today. The program finally got a little bit of love from its biggest critic, Elizabeth Warren, who is the program's government-appointed watchdog.

Her committee concluded that the $700 billion TARP, which bailed out US banks in an effort to save the overall economy last year, has largely been effective, to the extent anyone can really measure it.

Even better, the program is expected to cost $200 billion less than planned, and Bank of America (BAC) paid back its bailout money earlier this month while Citigroup (C) and Wells Fargo (WFC) continue to explore their options to do the same.

Treasury Secretary Tim Geithner announced plans to extend the program into next year.

But while TARP is getting a lot of positive attention, one of its offspring is facing new challenges. The PPIP is hitting a dip.

PPIP, one of the many acronyms that were born in the halls of the Treasury Department during the credit crisis, stands for Public Private Investment Program. It was created to help jump-start the market for the toxic assets that were plaguing so many bank balance sheets.

The idea was that investment firms could partner with the government in buying them up, and then banks would be able to lend again. The program is being funded by $30 billion out of the TARP money.

The program was met with skepticism, and it took longer than expected to get off the ground. Then, once it finally did, the credit markets began to recover, suggesting that the PPIP might not be needed after all.

But Treasury officials pressed on to commit $30 billion to funds in partnership with selected money managers, including BlackRock (BLK), AllianceBernstein, and Invesco (IVZ).

According to this morning's report from the TARP oversight panel, $23.3 billion has been committed. Since many of the funds have closed in recent months, just over $1 billion of that money has been disbursed.

But there are risks whenever the government sets up shop with private companies, and that became glaringly obvious on Wednesday. The Treasury Department suspended its operations with one of its private partners, the money management firm TCW Group.

TCW, it seems, is finding itself in a bit of trouble. Last week, it fired Jeffrey Gundlach, its chief investment officer, according to Bloomberg, amid what appears to have been a power struggle. Since then, 14 of the firm's 65 investment professionals in its fixed income division have quit, and the group is talking to clients about forming its own competing firm.

Money is following the investment managers out the door: Clients have pulled $1.7 billion from TCW funds.

What does this mean for TCW's partner, the Treasury Department and, by extension, the US taxpayer? Trouble.

Gundlach's departure triggered a clause in the PPIP agreement that calls for the program's suspension.

"Upon the occurrence of a Key Person Event, the PPIF [fund] cannot make investments or dispositions (other than to avoid a material loss)," a Treasury spokeswoman told Reuters. "Treasury is currently evaluating its options as an equity and debt investor in the PPIF."

In its report, the TARP oversight panel concluded that it's too early to assess the success of PPIP, but that Treasury contends that merely the announcement of it seems to have helped credit markets. The primary issue at the center of its purpose remains: how to value the toxic assets.

So far, PPIP isn't any closer to figuring that out. And getting caught up in the internal battles of its private partners isn't going help achieve that.

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